Summary of the Webinar on Mitigating the Impact of Covid-19 on Malaysian Palm Oil Trade

MPOC hosted a webinar on ‘Mitigating the Impact of Covid-19 on Malaysian Palm Oil Trade’ on May 12, 2020.

This webinar was moderated by Datuk Dr. Kalyana Sundram, CEO of MPOC. The distinguished panellists included Datuk Nageeb Wahab, CEO of MPOA; Mr. Mohd Haris Arshad, Managing Director of Sime Darby Oils, and Mr. U. R. Unnithan, Founder & CEO of Sumwim Global.

The webinar was opened with a special message from YB Dato’ Dr. Mohd Khairuddin Bin Aman Razali, Minister of Plantation Industries and Commodities (MPIC). YBM in his message appreciated the initiative of MPOC in holding this webinar to fill the vacuum created by movement control restrictions and social distancing measures. He added that regardless of the current situation, we must take this opportunity to gain information impacting the industry and the side effect of the MCO implementation to the daily business of our country main commodities. YBM also hoped that the panellists will provide us with insights on how to move forward to take on these challenges head-on.

During his opening brief, Mr. Mohd Haris Arshad, explained that palm oil prices will remain depressed throughout 2020 due to the loss of demand from food consumption and biodiesel sectors. Recovery in palm oil prices will only be likely upon the revival of global demand for food and non-food items. He expected that full recovery may only happen in the fourth quarter of 2021. Till then, the key to survival is by minimizing operating costs and to manage sales. He added that the palm oil industry will have to go through cost-cutting measures and planters will have to find ways to keep costs down amid the low price.

Dato’ Nageeb in his opening remarks predicted that the production of palm oil in Malaysia in 2020 will likely drop by 5% to 10% as opposed to 1.5% predicted by MPOC recently. He also anticipated that demand of palm oil in the global market will also drop significantly and this will contribute to high level of stocks. The other major concern highlighted by Datuk Nageeb was the labour shortage issue. Even before MCO, there was a labour shortage of between 10-30%, particularly in Sarawak and Sabah as the labour shortage is not as acute in Peninsular Malaysia. Over the past 3 months there has been repatriations of illegal foreign workers as no replacement was being made. MPOA is suggesting that the Government assists the industry to overcome the problem as many Indonesian workers have left for their country and are not coming back to Malaysia. The only alternative is to seek for workers from other countries such as Bangladesh.

Mr. Unnithan in his opening brief gave his insight of the palm oil market which he foresees will undergo various changes which revolve around health, food safety and environment. He believes such changes will affect the demand and among the sectors affected are HORECA and transports sectors. He estimated at least 30% – 40% drop from 3 major consuming countries.  Moreover, movement control, observed around the world will also affect the transportation sector where the biodiesel demand is seen declining and at least 10% drop in biodiesel production is expected in 2020. 

Summarizing the opening briefs of the three panellists, Datuk Dr. Sundram agreed that palm oil stocks which were 1.75 million MT at the end of January and went down to 1.72 million MT by the end of March are now sitting on a little over 2.04 million MT. The main reason behind this increase was the higher CPO production in the month of April which coincides with the increase in the stocks at the end of the same month. He added that the palm oil prices are under stress because of the reduction in the demand due to Covid-19 restrictions and low crude oil prices and that he estimates that the overall demand for oils and fats in 2020 could be around 25% lower when compared with the volumes of 2019.

However, Datuk Dr. Sundram clarified that palm oil is not the only commodity which is under pressure during this time. All major oils are facing the similar challenges. Between the periods of Jan and April, the prices of soybean oil, sunflower oil and rapeseed oil have declined by 22%, 12% and 19% respectively. Relative to these soft oils, the prices of palm oil have taken more discount, but this is a universal factor for all competing oils now.

Mr. Haris Arshad agreed that the crises with the prices of commodities is driven by demand as opposed to supply. He added that the worrying part of this situation is the split between the demand from food and non-food sectors. For the first time, the demand from the food sector of the world will see a correction this year and this situation is far worse for the non-food sector; especially, biodiesel demand. He believed the current prices of crude oil will test the will and resolve of the countries, especially in EU, with their biodiesel mandates.

Datuk Dr. Sundram added that the two major users of palm biodiesel and bioenergy in EU are Spain and Italy and both are among the worst affected countries with Covid-19 within EU. There has been extended lockdowns which have significantly reduced energy demand and it does not seem like their demand will come back anytime soon. He invited Mr. Unnithan to give his views on this situation.

Mr. Unnithan explained that with POGO around +USD240, palm biodiesel is not competitive and discretionary blending is nearly impossible. Giving example of Indonesia, he added that they are still implementing B30 mandate and in the first quarter of 2020 despite of low crude oil price, the biodiesel consumption has increased as compared to the first quarter of 2019. He was of  the view that the bigger problem right now is the declining demand from the food sector for palm oil and if Malaysia and Indonesia do not pursue their mandates as announced, the stocks will rise and that will bring down the prices which will have an adverse effect on small holders, upstream and downstream segments of the industry. He added that the Malaysian Biodiesel Association has always advocated that there is a price for greenhouse gas emissions. If GHG increases, then mitigating that can also cost in the range of USD 50 to USD 100 per MT equivalent of CO2. If we keep these numbers in perspective, then the producing countries have a rationale to continue with their biodiesel programmes. He reiterated  that a good mix of a cheap source of gas oil with palm biodiesel will give a competitive price and if we plan the balanced scorecard to manage our stocks well by Implementing the biodiesel mandate then we can manage the stocks well.

Referring to the production and stocks of pam oil in Malaysia, Datuk Dr. Sundram highlighted that we have a fairly good idea of how the Malaysian stocks and production will be in 2020, however, it would be extremely important to have an insight on the production and stocks level of Indonesia to have a better sense on how the prices will behave in second half of 2020. Datuk Dr. Sundram invited Datuk Nageeb to give his view on this situation.

Datuk Nageeb pointed out that at the end of March the stock level in Indonesia was 3.5 million MT. Due to continued dry spell and low fertilizer use last year, Indonesia production of CPO is also likely to go down by 5% or 10% as compared to 2019. However, the non-implementation of biodiesel programme in full will offset this loss of production and decline in global demand will contribute to increase in stock levels in Indonesia as well.

On the question of slow down in demand from China impact the profitability of the companies, the panellists were of the view that the slowdown in China demand happened in early part of the year, whereas the rest of the markets like India, Middle East etc. were still operating normally. However, the situation is a bit of a reverse now when China is opening gradually, and rest of the major markets are in full or partial lockdown. However, it was agreed that this is the right time for markets to buy since the prices of the commodity are low and China is taking advantage of that.

Datuk Dr. Sundram added that when the countries will start coming out of the effects of this pandemic, food security for their nation will be of paramount importance for them and palm oil, being the most affordable edible oil will have a huge role to play. The panelist also agreed that palm oil with its higher versatility both in food and non-food uses and with competitive price advantage will have a lot of opportunities in post Covid environment.

While answering the question about the prices of palm oil in the third quarter of 2020, Datuk Nageeb was of the view that the prices will range between RM 1800 – 2300 per MT depending on how fast the markets will recover form Covid-19, restoration of demand and level of stocks in Malaysia and Indonesia. Mr. Unnithan predicted that if Malaysia and Indonesia do not backtrack from their biodiesel programme and the Covid restrictions are lifted by July, then the prices will remain in the range of RM 2100 – 2300 per MT for CPO. However, if the Covid disruptions remain for the remainder of this year then the prices might drop to RM 2000 per MT. However, if there are disruptions in the biodiesel mandates in the two producing countries, then the prices can further drop to the level of RM 1800 – 1900 per MT.

The panel also discussed the recent development of cancellation of licenses for the import of refined palm olein. It was agreed that this move will have a negative impact, but our industry should take this as an opportunity to diversify into different markets and sectors, depending on one market is never a good idea. Datuk Dr. Sundram added that India remains a priority market for Malaysia and the current government is actively pursuing to sort the trade issues between the two countries and get India back on our major buyers list.

While discussing the impact of Covid-19 on sustainability efforts of palm oil and demand in EU, Mr. Unnithan was of the view that sustainability will play a vital role in post Covid environment. Malaysia is already on the forefront of sustainability efforts and there is need to show end-to-end visibility in the entire supply chain of our palm oil. Mr. Haris added that unfortunately the existing low prices will not incentivize the small holders to go for certification they will continue to be marginalized if the prices remain at this level.

In their concluding remarks, panellists were of the view that it is very important for industry to adopt best practices and cut costs as it is going to get harder before it gets easier. It was also stressed that this is the time to focus on localization efforts, be it biodiesel mandates or looking into ASEAN region. This time should also be used to prepare for post Covid era and we need to move quickly to meet the food safety criteria set by EU on 3MPCDE/GE norms of 1.25PPM/ 1PPM respectively to improve the food safety image.  There is also a need to adopt and intensify digitalization in supply chain. The shortage of workers in the plantation sector was another area which was highlighted, and it was stressed that this issue needs to be addressed on priority. Datuk Dr. Sundram thanked all panellists for their contribution and concluded that like all other oils and fats, palm oil industry is also going through a stressful and challenging time due to the pandemic.       However, this is not the first time that palm oil industry has faced challenges of such serious nature, we have been through times like these before and we have come out of it as winners. He added that the opportunities will present themselves and will make the best use of them by reinvent ourselves.

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